5/28/2009 @ 6:00PM

They Can Build Them; Why Can't We?

Chrysler is bankrupt and
General Motors
may be next. Both those companies and
Ford Motor
–which is neither bankrupt nor on the dole from the federal government–are shutting plants. In contrast, the non-U.S. automakers are still building U.S. factories.
Volkswagen
is erecting an assembly plant in Tennessee, Kia Motors has a plant going up in Georgia, and
Toyota Motor
is putting one up in Mississippi, although it has delayed opening there because of the slump in auto sales.

Foreign auto manufacturers and suppliers already have a massive presence in the U.S. Many of these new transplant factories are in the Sun Belt: South Carolina (BMW), Mississippi (
Nissan
), Tennessee (Nissan), Alabama (Mercedes,
Honda
and Hyundai), Texas (
Toyota
), and Kentucky (Toyota). The foreigners do have a few plants in the North, too: Honda in Ohio and Indiana, and Toyota and Subaru-Toyota in Indiana.

Most of the foreign-owned plants are non-union, with a few exceptions. Mitsubishi has a unionized plant in Illinois, though the future of that factory is uncertain.
Mazda
builds cars in a Ford-run plant in Michigan, and there is a unionized Toyota-GM joint venture in Fremont, Calif. Italy’s
Fiat
plans to build its vehicles in one or more Chrysler facilities (all of Chrysler’s plants are unionized).

This transplant industry is replacing Detroit’s manufacturing. Through mid May, all North American assembly plants (including Canada and Mexico) have built 2.77 million cars and light trucks, half the production level of the year-earlier period. Of these, Detroit’s Big Three have built only 1.5 million of these vehicles, just 268,000 more than the transplants.

It may only be weeks or a few months before the transplants will be building more vehicles here than our old Big Three. The foreign producers have reduced production in this downturn, but they have not permanently closed plants. Except for the Mitsubishi factory in Illinois, the others all seem safe.

When times are good, these American transplants are quite profitable–in fact, they are the greatest earning centers for Toyota and Honda. But it wasn’t always this way: A while back, I recall the chief financial officer of Toyota (he later became chief executive) coming to America and telling me: “General Motors makes money manufacturing cars in the U.S. Ford makes money building cars in the U.S. I’m here to find out why we aren’t making money building cars in the U.S.”

Toyota solved its problems, while the Detroit automakers collapsed. One reason: the unions.

The Detroit auto plants are all unionized (United Auto Workers), and union stewards are on the company payroll at every car plant, at a cost of millions of dollars. The UAW works to keep the production pace down. One “transplant” plant manager who used to work for Detroit figures his people were working 10% faster that at a Detroit plant. If Detroit workers did 50 jobs an hour, his people did 55.

Detroit pay and benefits ran about $55 an hour, vs. an average of $45 for the transplants, with Korean automakers paying less. Those “legacy” costs–health care and pension payments to retirees–add another $16 an hour to the domestics’ costs. So Detroit’s total labor runs about $70 to $75 an hour, vs. $49 for Japanese transplants.

In the current crisis, the union has been making big concessions, but it’s too late. The transplant workers are new, young and country-style. Suddenly, they had real jobs and futures–instead of pumping gas or growing old working at burger joints. The Big Three workers are older, tired and often from urban environments. Doing less was always the goal, and they bragged about it, too, which is why auto workers may not be particularly popular, even in their own towns. Foreign manufacturers, with American plant managers, won over their factory workers with a new culture: uniforms for everyone, democracy in the parking lot and no executive dining rooms.

The foreign culture was about more than parking spaces. Its real focus was on eliminating class warfare from the factory floor. The Japanese and the Germans, too, put particular emphasis on teamwork and quality. Detroit talked a lot about quality but did not always deliver on its promises. Quality means everything from poor fit and finish, gaps between exterior and interior parts, hard plastic that looks cheap and transmissions that break down at 50,000 miles. My favorite Detroit expression was “perceived quality.” That meant if you paid $30,000 for a car and found a scratch in the door, it wasn’t a quality issue. Why? The car still ran, so it was “perceived quality.”

Listen to Robert Dewar, who worked at Ford’s Sharonville, Ohio, transmission plant in the late 1970s: “Final quality fluctuated with the amount of power granted to the Quality Control Department. When sales were strong and growing, QC was treated like an annoyance that was getting in the way of making the numbers. If a QC supervisor tried to be a hero, and made a stand, production simply went to engineering and got an ‘engineering deviation,’ which allowed the use of defective parts in the interests of production. So much for control of quality.”

As quality complaints piled up, Detroit tried to imitate the foreigners, and we heard a lot about quality programs, quality circles and quality gurus. Why didn’t they succeed? Robert Dewer’s book, A Savage Factory, describes the factory floor like a constant war between rival street gangs, management vs. the union and workers. His book is well worth a read.

Toyota took over a badly managed GM plant in California; it was a joint venture, but the Japanese ran the plant. GM sent young executives to work there and learn Toyota’s manufacturing and quality techniques. They learned, but when they came back to GM, the GM bureaucracy would not change its ways.

Under former Chief Executive Roger Smith, GM set up the new Saturn factory with a new type of work-together atmosphere with the UAW: no time clocks, annual pay and teams. The company and the union both hated the new ideas, and when Roger was gone and the UAW got a new president, they worked at–and eventually succeeded in–destroying the Saturn brand.

Even the good car people–like Robert Lutz, who saved Chrysler and led the product revival at GM before its fall–did not believe there was a quality gap between Detroit’s cars and the transplants. But mechanics working on cars knew better, when they kept finding failures in sub-assemblies such as the heating and air conditioning systems, which are hard to get at and expensive to repair.

Detroit’s problems go beyond the factory floor; Washington also deserves blame for the catastrophe. Our politicians refused to defend the auto industry, allowing the Japanese to develop their car business here with imports paid for with undervalued currency. Our government never insisted on realistic currency exchange, or that foreign countries, including Japan and Korea, allow our companies to manufacture on their soil and sell in their markets.

Why wasn’t our government more demanding? The Pentagon and the State Department were more interested in seeing Japan and South Korea with strong capitalistic economies and as bastions against communism. They never really cared about Midwestern metal-benders.

Asian nations were not overt, but instead used subtle means to discourage U.S. companies from making strong inroads into their markets. Ford, for example, once announced it would build an assembly plant in Yokohama, Japan. Then the authorities condemned the site for the construction of a sewage plant. At one time, the South Korean equivalent of the IRS investigated anyone who bought a foreign car. The exception: If a foreign company was going down, foreign governments allowed the Americans to come in and save it, as the Koreans allowed GM to take over and rescue Daewoo.

Then there are government rules and regulations: the Environmental Protection Agency, Occupational Safety and Health Administration and others. This is not to say that all those rules on worker safety, on pollution and everything else are not good, but they do push up costs. We know the same rules do not exist in China, Mexico and South Korea.

State governments have also done their share to help cripple the home team. They heavily subsidized the building of new plants by foreign car makers. Such aid included paying for roads, water and sewage, worker training and tax relief. A $500 million subsidy per plant was not unusual. Foreigners have been building cars in new, modern factories, built for flexible production, with tax abatements, while Detroit companies were stuck in less efficient plants.

At one time, General Motors considered a Southern strategy–building new plants in areas where workers were unlikely to vote in a union. The United Auto Workers made it clear it would fight, legally or illegally–meaning strikes, slowdowns and chaos in GM’s more northern plants. GM gave up on the idea.

What about Detroit’s managers? Exports from America were never important to them: GM and Ford believed in building the cars that people wanted, but building them in their respective markets. Thus, they had operations in Europe that built cars the Europeans liked, and the same in South America and China. That was fine, but American executives also had a prejudice against small cars and small engines. In the Midwest, bigger is better.

The truth is that a smaller car costs nearly as much to build as a bigger car, and our execs could not see how they could sell a smaller car unless its sticker price was considerably below that of a bigger car. This enormous mistake opened the market here to the foreign automakers, which developed a growing market for smaller cars, and then moved up-market to bigger, more expensive and higher-margined vehicles.

It has not helped that the modern leaders of Detroit were preoccupied with Wall Street, the stock price, quarterly projections and stockholder values. In contrast, the Japanese focused on product quality and engineering, and continuously improving their factory systems.

One more thing: Car plants become profitable when running full and with overtime. To do that, the car companies must build vehicles the customers want. Detroit’s managers not only didn’t care about the factories, they didn’t care about the products or understand American car buyers.

Times have changed. The worker-management battles in Detroit’s factories may have ended. The union and companies may embrace each other, and the quality may be as good as the foreign competition. Unfortunately, Detroit may have already damaged its reputation beyond repair.

Yes, Washington’s lack of interest and support, state subsidies of foreign manufacturing, high union wages and inflexible work rules all hurt domestic car companies. But the failure of American managers to build better cars is what really has led to the crisis in Detroit.

Read on for more about jobs, manufacturing and the economy in our special report, “Made In America.”